In a move aimed at easing shareholder backlash and boosting the odds that its buyout of wounded investment bank Bear Stearns bsc closes quickly, JPMorgan Chase jpm raised its offer to $10 a share from its initial bargain-basement price of $2 a share.
In exchange for sweetening the deal, JPMorgan negotiated the purchase of a 39.5% equity stake in Bear Stearns, as well as assurances from its board that it will vote in favor of the new deal, announced Monday.
Both concessions were key for JPMorgan, as it lowers the hurdle needed to get shareholder approval. The deal needs more than 50% approval. JPMorgan would have 45% yes votes under the amended deal. It's likely to get the needed 5% from Bear bondholders.
"It appears it was a trade," says David Trone, analyst at Fox-Pitt Kelton. "It virtually guarantees a yes vote at $10 per share, vs. an almost certain no vote at $2."
The board of directors at both banks and the Federal Reserve signed off on the new terms. "The amended terms are fair to all sides," JPMorgan CEO Jamie Dimon said in a statement, adding that it would bring more certainty to the market. Dimon hopes the deal will close promptly. Alan Schwartz, Bear Stearns' CEO, said the terms "provide greater value to our shareholders."
Shares of Bear Stearns soared $5.29, or 89%, to $11.25. The fact that shares closed above the $10 deal price suggests some traders are betting JPMorgan will have to raise its bid again to cement a deal or will be trumped by another party, notes Jon Najarian of OptionMonster.com. But Najarian says the most likely end game is for JPMorgan to complete the deal, perhaps at a slightly higher price. JPMorgan rose 1.3% to $46.55.
The sweetened deal comes a week after a last-ditch effort to rescue Bear Stearns from bankruptcy and head off a broad financial meltdown resulted in a fire-sale price. Under new terms, JPMorgan will bear the first $1 billion of losses associated with Bear Stearns' assets, and the Fed will fund the other $29 billion.
The initial low-ball bid, which came before the Fed's decision to make credit lines available to broker dealers such as Bear Stearns for the first time, was greeted with a backlash from Bear shareholders and employees. The $2 bid, for a stock that traded at $160 within the last year, wiped out investors and employees.
The deal is scheduled to close April 8. One potential glitch is that only in "exceptional" cases does the New York Stock Exchange let a firm sell more than 20% of its shares without shareholder approval. Brad Hintz, an analyst at Sanford C. Bernstein, isn't convinced Bear's case is extreme, given that it already had a guarantee from JPMorgan and has access to the Fed's cash.
"My guess," says Hintz, "is this issue will be determined in a courtroom. Bear's stock rally means … the continuing saga of Bear and JPMorgan isn't over yet."